Singapore and Hong Kong have been the most open economies in the world
during the past fifty years. While the former went through a brief
import-substitution period during 1960s, the latter has been entirely free
of trade barriers throughout this period. How do
we explain this success of the two economies during a period when all
other developing countries found themselves resorting to protection?

The
commonest answer to this question is that the domestic market in Singapore
and Hong Kong was too small. Reliance on exports was a natural response to
this small size of the internal market.

Though
plausible sounding, the late economist Bela Balassa correctly argued that
it fails to stand closer scrutiny. Balassa reminded that with a population
of 2 million in 1950 and relatively high per capita income derived from
trading activities, Hong Kong, China had a larger domestic market for
manufactured goods than the majority of the developing countries. Yet,
many of these latter countries embarked on industrialisation behind high
protective barriers. For example, Tunisia had a home market smaller than
that of Hong Kong, China but it went on to establish small local plants to
serve the domestic market behind a protective wall that remained in
existence for decades.

An
alternative explanation of the victory of free-trade policies in Hong Kong
and Singapore has been offered in terms of their geography. They are both
island economies that stood to benefit from large volumes of trade that
free-trade policies may generate. For example, Singapore was a natural
port to serve as a way station for storage and final processing of goods
destined to and originating from the neighbouring countries in south east
Asia.

While
this feature of geography may have played some role, by itself it is
insufficient to explain why pro-export interests won over import-competing
interests in these economies but not elsewhere. Sri Lanka, Mauritius and
Madagascar were all island economies but fell prey to protectionist
policies for achieving industrialisation.

The
failure of protectionist interests to assert themselves in Hong Kong,
China and Singapore during the last half-century must be explained in
terms of two other mutually reinforcing factors. The first of these
factors relates to history. By 1950, both Singapore and Hong Kong, China
had accumulated a long history of free trade. Singapore had become a
British Colony under the Straits Settlement in 1867. The British gave it
free-trade status. Likewise, after colonising it, the British adopted free
trade policies in Hong Kong as early as 1840s. Free-trade status of these
economies resulted in a large expansion of re-export trade. During
1960-67, the share of re-exports in total exports in Singapore had reached
85.6 per cent. This large share of re-exports made trade barriers costly
and, thus, strengthened the hands of pro-export interests.

The
second reason why free-trade policies could be sustained in these two
economies during the past half-century is the absence significant
agricultural activity there. For example, in 1970, only 3.78 per cent of
Singapore’s labour force was engaged in agriculture, fishing and
quarrying. As much as 23.44 per cent of the labour force was engaged in
trade and 21.98 per cent in manufacturing. The remaining 50.8 per cent of
the population was engaged in construction, utilities, transport,
communications, financial, business and other services. Thus, the pressure
for transformation from a principally rural, agrarian economy to an
industrial or service economy that other developing countries faced during
the early part of the last half-century was essentially absent in
Singapore and Hong Kong. With industry and exports already having a
significant presence, the pressure for achieving industrialisation behind
a high protective wall was contained.

In
the case of Singapore, considerable credit for the success of pro-free
trade policies also goes to its far-sighted leaders. The
import-substitution ethos among policy makers during the early part of the
last half-century was too powerful for any developing country government
to escape. Consequently, the Singapore government also introduced import
quotas on a small number of selected products during 1965-69.

But
the Singapore government was careful to credibly inform the industry that
such protection was temporary. The need for the quota for each product was
reviewed once every six months. If the particular industry was found not
making any serious effort to succeed in its ventures, import quota
protection was withdrawn. Quotas were also removed when industries were
able to function without further protection from government. As a result,
by early 1970s, Singapore had returned to the policy of near free trade
that prevails till today. Few developing countries have succeeded in
rolling back protection with this textbook efficiency.

India’s
experience on trade policies is in sharp contrast to that of Singapore and
Hong Kong, China. A key factor behind increased protection in the early
phase of development was undoubtedly the initial structure of the economy.
In 1950, India began with a very high proportion of its workforce in
agriculture. This fact, combined with the prevailing import-substitution
ethos, ensured the choice of protection as a key instrument of
industrialisation. But subsequently, the interest group politics became
dominant. As Jairam Ramesh has emphasised in his recent writings, a key
problem India continues to face even after fifty years of development is
one of continuing high share of labour force in agriculture. Despite the
sharp reduction in its share in the GDP from 50 to 25 percent, agriculture
accounts for two thirds of India’s labour force. In part, this has been
due to the failure of labour intensive industry to expand. In turn, this
requires continued export expansion and hence reduced protection at home
and more open markets abroad.

In
this context, the forthcoming WTO ministerial conference in Qatar offers a
major opportunity to launch a new round of trade negotiations that could
help bring the level of protection down around the world.